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Cities Do It Better

By Edward L. Glaeser April 27, 2010 10:30 amApril 27, 2010 10:30 am

Julian Finney/Getty ImagesThe sun sets over the New York City skyline.

Edward L. Glaeser is an economics professor at Harvard.

What makes dense megacities like New York so successful? One reason is that urban scale and density strengthen markets by bringing together an abundance of buyers and sellers in an information-rich setting.

Economic geography has its roots in the work of the early 19th-century economist Johann Heinrich von Thunen, who understood that proximity reduces shipping costs and that natural advantages, like ports or coal mines, can anchor cities.

The 19th-century English economist Alfred Marshall is typically given credit for recognizing that cities exist not only to save transport costs for goods, but also to speed the flow of people and ideas. He is responsible for the often-used line that in dense cities “the mysteries of the trade become no mystery, but are, as it were, in the air.”

Marshall also saw the advantages of large urban labor markets, where abundant independent employers compete for workers. Imagine for example what would happen in Hershey, Pa., a k a “the sweetest place on earth,” if chocolate were discovered to have deadly side effects. In a multi-industry city, like New York, workers could readily find some other employer. The young Chester Carlson was laid off from Bell Labs during the Great Depression, then moved to a law office as a patent clerk and then joined the electronics company that would make Duracell batteries and then invented the Xerox copier.

An abundance of employers also enables young workers to find their life’s calling by experimenting at different jobs — waiting tables, acting on Broadway, trading long bonds, etc.

Henry Overman and Diego Puga’s chapter in “Agglomeration Economics” — a book I edited and have written about in the last twoposts — tests this idea, which is often called “labor pooling.”

They note that the biggest advantages from labor pooling will occur among sectors that experience highly unpredictable, firm-specific shocks. They then find that more idiosyncratically volatile firms are most likely to locate in clusters where workers can easily move to another employer in the event of a shock.

During the recent recession, unemployment has been highest in places with little sectoral diversity, like Detroit or the cities of central California. In other, older work, the economists Dora Costa and Matthew Kahn have argued that this urban benefit has become particularly important as skilled women enter into the labor market. They argue that well-educated “power couples” (like themselves) increasing locate in megacities because large urban labor markets enable both spouses to find jobs that fit their talents and interests.

Jed Kolko’s essay in the “Agglomeration Economics” volume reminds us that the delivery of services often involves face-to-face contact, whether in a barber shop or a law office. While the costs of moving goods has declined steadily over time, the cost of moving people has not because time has gotten more valuable and you need time to travel. This explains why business services, which generally rely on face-to-face contact, are disproportionately prone to locate in cities. Mr. Kolko finds that the most skilled service industries are most likely to locate near each other and to locate in dense urban areas.

Mr. Kolko’s paper also shows that customers and suppliers that rely most on information technology are also most likely to locate near one another.

Perhaps unexpectedly, information technology seems to be associated with a greater desire for geographic proximity. After all, Silicon Valley — the home of information technology — is the most famous example of a geographic cluster in the world today. One reason new technologies make face-to-face contact and proximity more valuable is that technological change increases the returns to being smart, and human beings get smart by hanging around other smart people.

Cities, like New York, thrive as places of pleasure as well as work. Urban proximity enables people to connect with one another by creating, among other things, urban marriage markets. Large urban scale can also cover the fixed costs of urban amenities like museums and live music venues and clubs.

The Joel Waldfogel essay in “Agglomeration Economics” emphasizes the benefit that comes from being around people who share your own tastes.

If you live in a county of vegetarians, then your local supermarket is likely to be short on beef. If you live surrounded by voracious (and prosperous) carnivores, then you are much more likely to find U.S.D.A. prime at the butcher counter. The shopping options in Manhattan are tremendous by world standards, because of the vast number of customers on the island, and that is part of New York’s appeal.

Cities are a natural topic for economists because urban density can magnify markets, like the markets for workers and balsamic vinegar and spouses. That urban strength also explains why cities have proved to be so robust, and so fun.

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